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Digital Transformation: Building The Future of Construction
By Ian Shapiro, Adam Rouse and Malcolm Cohron
The construction industry is due for a digital renovation. Faced with challenges around project efficiencies, ongoing safety concerns and flat-lining labor productivity levels, the industry’s sluggish adoption of new technologies has reached an inflection point. Digital transformation requires changing processes and using new resources that harness the power of data to improve communication, efficiency, productivity and safety. This can position construction firms for profitable growth in a highly competitive industry, while also addressing workforce challenges.
The construction industry has a workforce that skews older, and as more baby boomers head toward retirement, the industry faces a labor shortage that’s poised to get worse. According to the U.S. Bureau of Labor Statistics, there were about 300,000 construction job vacancies in June 2019, and the industry is expected to need 747,000 more workers by 2026. While the demand for skilled craftspeople has continually increased, fewer young people are entering the industry.
Potential recruits just don’t see construction as an attractive and viable career option, especially when other sectors are considered more tech-savvy and offer perks that appeal to millennial workers. To navigate these conditions and sharpen their competitive edge, construction companies need to adopt a bifurcated strategy: invest in new technologies to streamline operations and lower costs from blueprint to final product, and invest in the workforce through retraining initiatives and by bolstering the talent pipeline.
Addressing Old Challenges with New Technology
Transforming construction means more than introducing modern technologies to the industry: Technology correctly incorporated has the effect of rippling through and improving interrelated processes. This requires assessing the current state of a business, strategizing for the future state and then mapping a journey to that future.
Digital transformation goes far beyond digitizing analog functions; it enables a fundamental shift in how a business operates so that it can compete in a digital world. Three key areas of transformation are ultimately enabled by end-user adoption: Digital Business enables growth, Digital Process improves efficiency and profitability and Digital Backbone securely facilitates usability for business needs.
Identifying and adopting valuable digital tools, data-enabled hardware and field software can provide a solid foundation for sustained growth. For example, using drones or unmanned aerial vehicles (UAVs) for aerial photography can help expedite a land survey and assist planning through digital imaging techniques, precise topographic mapping software and data analytics that inform building strategy. Continued UAV surveillance can also help secure the site and inspect for safety hazards or structural issues. When applied in conjunction with 3-D printing, automated equipment tracking and progress reporting, these innovative building techniques reduce the time, effort and cost involved in more traditional construction approaches.
In an industry that has been challenged by disruptions to the price of materials—including tariffs of 25% on steel and 10% on aluminum imposed in 2018—increasing efficiencies and reducing controllable costs are more important than ever. Innovative software can identify and quantify work tasks, reducing or eliminating extraneous work to help maximize time and minimize effort. Supply chain information can even be tracked in the cloud, increasing transparency and accuracy by collecting that data within a single platform. Digital tools not only support the project budgets and timelines, but also promote worker safety and sentiment.
Navigating Workforce Woes
Workforce challenges in construction abound. The industry has been contending with a lack of organized site management, miscommunications between the field and regional office and a downward trend in employee morale.
The flow of information from job site to regional office to corporate can be fragmented, delayed and incomplete. The amount of time it can take to input information into the system leads to lack of real-time visibility into a project’s progress, which can ultimately have an impact on cashflow. Integrating data can streamline communication and deliver more accurate information more quickly. Work in Progress (WIP) tools track work in real-time, making sense of data that can then be used to inform subsequent project plans. They also allow for more accurately designed scheduling with the appropriate amount of margin and risk tolerance built into project plans. Similarly, Building Information Modeling (BIM) can synthesize all essential aspects of a project’s input into a single plan with 3-D modeling, wherein contributors can stay in timely communication.
Digital transformation can also help attract younger workers to the industry by creating more jobs that require tech skills. U.S. News & World Report noted in 2018 that less than 10% of construction workers are younger than 25, while the median age is above 42 years old. Modernizing processes through increased adoption of technology can both create new jobs and future-proof the industry.
Technology also enables construction managers to standardize approaches across a project (or multiple projects), facilitating additional clarity in delegating responsibility and even safety. The IDC predicts 279 million wearables will be in use by the end of 2023, a technology that can be applied to increase site safety and monitor for productivity. For instance, sensors attached to workers’ clothing or hard hats can track signs of fatigue to prevent an accident, monitor body temperature to avoid hypothermia or heat exhaustion, send an alert through noise or vibration to indicate a hazard and provide supervisors with real-time information about the number and location of employees on site.
For companies who can augment their capabilities now, successful digital adoption may reinforce their competitive capabilities and lay the foundation for a successful future. From project management tools that offer real-time communication, updates and project overviews, to cloud and mobile technology, advanced uses for GPS, robotics, drones and more, innovative applications of technology can fundamentally change the project design and development process. Digital transformation can be the means for the industry to navigate workforce issues, discover new efficiencies and build an integrated platform to reinvigorate growth for generations to come.
This article originally appeared in BDO, USA, LLP's "BDO Knows Alert" newsletter (December 2019). Copyright © 2019 BDO USA, LLP. All rights reserved. www.bdo.com
What Companies Should Know about Final Section 263A Regulations
What is Section 263A?
Section 263A, often referred to as the Uniform Capitalization rules or UNICAP, requires taxpayers to capitalize direct and indirect costs properly allocable to real or tangible personal property produced or acquired for resale by the taxpayer. For example, manufacturers, resellers and distributors of inventory generally must undertake an analysis every tax year to determine which costs must be capitalized, rather than currently expensed, under Section 263A. The costs that must be capitalized for tax purposes typically exceed the amounts capitalized for financial accounting purposes. Accordingly, many taxpayers must capitalize “additional Section 263A” costs to property acquired or produced as an unfavorable temporary book/tax adjustment (i.e., an addback to taxable income).
What do the final Section 263A regulations address?
Taxpayers can use a
variety of methods to identify and allocate additional Section 263A costs, including
certain simplified methods for producers and resellers of inventory. Issued in
November 2018, the final Section 263A regulations contain significant
changes for taxpayers who are currently using the simplified methods by
providing definitional guidance for Section 471 costs and adding a new method
for certain taxpayers with average annual gross receipts exceeding $50 million.
The regulations also address the treatment of so-called “negative Section 263A
costs,” which arise when a particular expense is capitalized for book purposes
but is not required to be capitalized for tax purposes (e.g., R&D
costs or freight-out costs).
Who do the regulations impact?
Large producers of
inventory (including taxpayers that utilize contract manufacturers) that are
presently using the simplified production method will have to change their
method if their average annual gross receipts exceed $50 million on an
aggregated basis. If a large producer wishes to use a simplified method going
forward, it must change to the new modified simplified production method.
Otherwise, taxpayers also have the option to change to a facts and
circumstances method, which is generally more time-consuming to implement and
maintain.
Smaller producers with gross receipts under $50 million and resellers of any
size may have to change their existing simplified method as well to adopt the
new definitional guidance for Section 471 costs provided in the final
regulations. Further, the regulations offer several simplifying de minimis
tests that producers/resellers of inventory of all sizes should consider.
What should companies do?
Taxpayers subject to
UNICAP should evaluate their existing methodologies and determine what changes
are necessary in order to comply with the final regulations for tax years
beginning after November 20, 2018. In general, implementing an accounting
method change requires the preparation and filing of Form 3115, Application
for Change in Accounting Method, and the computation of a Section 481(a)
“catch-up” adjustment. As the preparation of the Form 3115 and the related
Section 481(a) adjustment can require extensive analysis, taxpayers should take
immediate action to begin assessing the impact of the new rules. To ensure
adequate time to properly reflect the adjustment for both tax return and
financial accounting purposes (if applicable), these conversations should
begin, at the very latest, during the first few months of the 2019 taxable
year.
How can we help?
We can review existing Section 263A calculations to identify what changes must be made to comply with the regulations. In many instances, we may be able to identify additional opportunities or address exposures associated with historical calculations. We can also assist with the preparation, review and filing of the Form 3115 to ensure that all procedural considerations are appropriately addressed.